Capital Gains Tax - Back to basics

In this day and age, it is becoming harder and harder for first home buyers and investors to get ahead financially. As experts in real estate, we see our clients frequently turning to us with a common question – how do I work out my Capital Gains Tax?

Nine times out of ten, the term Capital Gains Tax (CGT) is met with confusion and misunderstanding by clients. You will be pleased to hear, however, that with a little bit of knowledge and strategic planning it is possible to significantly decrease how much you pay of this tax burden.

 Let’s go back to basics.

WHAT IS CAPITAL GAINS TAX?

In simple terms, CGT is calculated on the profit you make when you sell an investment, less any fees. This profit is classified as income and therefore you are required to pay tax on this item.

HOW DO I CALCULATE CAPITAL GAINS TAX?

Your capital gain is calculated like this:

1)  Deduct any costs associated with the buying and selling of your asset such as agent fees or legal costs from the sale profits.

2)  If you have made any eligible capital losses for the financial year, deduct this from the sale profits.

3)  Apply any applicable discounts. The most common discounts include 50% for individuals and 33.33% for super funds which apply if the property is held for 12 months or more. Unfortunately, companies are not eligible for any discounts.

4) The remaining figure is your net capital gain which you are required to pay tax on.

REAL ESTATE & CAPITAL GAINS TAX

In terms of real estate, CGT is payable on your net profit made on selling the property, which is the amount that your investment has increased over time from when it became an investment, minus any fees. For example, the $60k profit made from that handy investment property you purchased 5 years ago is added to your income and will significantly increase the tax you need to pay. The more capital gains you make through a good investment, the more tax that will be applied.

Some important things to note:

•  If you’ve made a capital loss, this can be deducted from your capital gains that you’ve made from other sources.

   Unlike your normal weekly income, CGT tax is not withheld. It is important to work out how much tax you will need to pay to ensure you don’t get hit with an unexpected tax bill.

• A property only attracts CGT for the period of when the property is utilised as an investment.

• Personal assets such as your home, car and furniture do not attract CGT.

The main residence exemption applies to the dwelling you live in and the land sold with the dwelling (up to a limit of 2 hectares or approximately 5 acres) as well as other structures such as a garage. The dwelling, land and structures must be used for private or domestic purposes only to qualify for the CGT exemption.

TIPS & TRICKS

Now you understand what the common term CGT means and how it works, you’re probably thinking what an easy way for the government to make money, right? So, let’s go through some tips to reduce CGT on your smart investment opportunities.

1. )  Avoid paying CGT by living in the property and claiming the main residence exemption.

2. )  Look into switching to a Self Managed Super Fund (SMSF) as these funds can borrow money and be eligible further CGT discounts

3. )  Considering the timing of when you make the capital gain. If you know your income will be lower in years to come, perhaps delay selling your asset until then so your marginal tax rate is less.

Please note, the information that has been provided in this article is not financial advice. Though it is always best to gain professional advice on your specific needs, we hope this article puts you on the right track and sets you on your way to being in control of your financial decisions.